By Joseph Romano, Esq.

BWW Law Group, LLC *

USFN Member (MD, DC, VA)

On June 14, 2023, the U.S. Court of Appeals for the 4th Circuit confirmed that a Chapter 13 debtor who earns more than the median income may use their actual mortgage payments when calculating disposable income available to pay unsecured creditors. The opinion in Bledsoe v. Cook, 70 F.4^th 746 (2023) aligns the 4^th Circuit with the 6^th and 9^th Circuits on this issue.

In 2021, Mr. and Mrs. Cook filed a Chapter 13 Petition in the U.S. Bankruptcy Court for the Eastern District of North Carolina. In calculating their disposable income to be paid in their court-approved plan, they deducted their actual monthly mortgage payment. The trustee objected, arguing that the National and Local Standards issued by the IRS caps the amount a debtor may deduct for secured mortgage payments. The Bankruptcy Court overruled the trustee’s objection and, on the request of the trustee, certified an appeal directly to the 4^th Circuit Court of Appeals under 28 U.S.C. § 158(d)(2)(A).

The 4^th Circuit took a “plain language” approach in affirming the Bankruptcy Court. The Court noted that 11 U.S.C. § 707(b)(2)(A)(iii) allows a debtor to deduct amounts “contractually due to secured creditors” or “any additional payments to secured creditors necessary for the debtor . . . to maintain possession of the debtor’s primary residence.” The Court reasoned that if petitioners were not permitted to deduct their entire mortgage payment, they may be unable to afford to maintain their primary residence in direct conflict with the plain language of the Bankruptcy Code. They rejected the trustee’s argument that actual mortgage payments may only be deducted upon proof that the amount above the relevant Local Standards is “reasonable.”  The Court disagreed noting the legislative intent of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was to curtail bankruptcy court discretion and declined to restore the discretion Congress sought to remove.

While the holding in this case is fairly simple and its arguments are straightforward, it will have fairly significant effects on bankruptcy courts in the Fourth Circuit. Since the inception of BAPCPA in 2005, bankruptcy courts have split on the proper treatment of mortgage payments in calculating disposable income under Chapter 13. This ruling will allow debtors with mortgage payments that exceed the allowances in the Local Standards to create a more reasonable budget, resulting in an increased likelihood of plan completion.  Mortgage servicers incur significant costs with repeat filers who fall in and out of bankruptcy as they try to forge a feasible plan. Hopefully, this opinion will result in fewer repeat filers as more Chapter 13 Plans are satisfied and seen to their intended conclusions.

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USFNews - Aug. 23